In the current global dry bulk market, while large shippers exercise increasing influence, traditional shipping companies see their role shrinking. Large shippers have different strategies for owning and chartering ships, and more of them charter than own ships, thus exercising a strong influence on the shipping market.
Examples of large shippers chartering ships
The US-based Cargill, which is the world’s largest grain trader founded in 1865, is a global corporation that has expanded its business into food, energy, and financing and has its operations in 68 countries. Cargill not only accounts for 40% of the world’s grain distribution, but also exercises tremendous influence in markets for dry bulk carriers and shipbuilding, which are needed to transport grain as well as energy resources.
In 2012, the quantity of goods transported by Cargill amounted to 200 million tons (tantamount to 500 dry bulk carriers), and in 2013, the company chartered some 350 dry bulk carriers, thus wielding an enormous influence on the shipping market. Furthermore, Cargill is taking full advantage of Forward Freight Agreement (FFA) market, for the purpose of reducing transport costs and creating profits in shipping.
Switzerland-based Glencore is an Anglo–Swiss multinational commodity trading and mining company. It is a global corporation ranked 20th in the Fortune Global 500 list of the world’s largest companies. Chartering minimum 200 ships all the time, the company exerts such a significant influence on the shipping market.
Glencore also keeps in Singapore a subsidiary called ST Shipping, which, while not too large, has a great influence on the shipping market through chartering. Moreover, as the world’s largest supplier of steam coal, the company asserts a powerful influence on the freight rate for steam coal.
Brazil-based Vale operates 35 400,000-DWT Valemax vessels by owning them or chartering them on a long-term basis. In the period of 2007 to 2008 when freight rates were flying high, the company reduced its dependence on the short-term transport market and instead pursued economies of scale by owning or chartering ultra-large ships on a long-term basis.
As it had to cover a longer distance than Australia, a rival country in iron ore export, the company came to seek economies of scale using ultra-large vessels for the purpose of strengthening its export competitiveness. In other words, Vale’s strategy is to secure its profitability by reducing the cost for its entire supply chain with ultra-large ships.
Ship chartering expected to increase with a view to avoiding the financial risks of owning ships
Thus, large shippers prefer to charter rather than own ships, because they see less financial risk in chartering ships by taking advantage of such hedging strategies as FFA than in investing a huge money to own ships.
In fact, the Australia-based BHP, which spent a lot of money in ships, ended up with lower-than-expected rate of return and faced lower freight rates with too many ships in the market, had to give up its shipping business. So, we expect that more large shippers will opt to charter ships instead of owning them, which trend will exert greater influence on the shipping market.
In our next article, we will take a closer look at why large shippers want to increase their sway over the shipping market.